05 January 2010

FAQ on GST by TB Chaterjee

In Pursuit of Knowledge

Indirect Taxes

Goods and Service Tax (GST) Through Frequently Asked Questions

Timir Baran Chatterjee, Sr. Executive
Vice President (Corporate Affairs & Legal) and Company Secretary

Q.1 What is GST?

A. GST stands for Goods and Service Tax. It is a comprehensive value added tax.

Through a tax credit mechanism, GST is collected on value added goods and services at each stage of sale or purchase in the supply chain. GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services. But being the last person in the supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a last-point retain tax.

Q.2 How GST will have its impact on revenue for the producing states?

A. GST is a consumption based tax and not origin based. Under GST structure, the tax would be collected by the states where the goods or services are actually consumed i.e., where the goods are actually sold and not the goods where it is actually originated. Hence, losses could be heavy for producing states. In view of the above, the Centre is considering a proposal to compensate states for any revenue loss that they might suffer on implementation of the Goods and Services Tax. The move is expected to encourage the producing states to adopt the new tax structure scheduled to be implemented from April 1 next year.

Q.3 Which country introduced GST first?

A. France was the first country to introduce this system in 1954. Today it has spread to over 140 countries.

Q.4 Will prices go up after the implementation of GST?

A. In fact, the prices of commodities are expected to come down in the long run as dealers pass on the benefits of reduced tax incidence to consumers by slashing the prices of goods. So far services are concerned, the prices could increase in the short term in view of the increase of tax rate from the present 10% to approximately 14% to 16% under GST regime.

Q.5 Who would be impacted by the implementation of GST?

A. All businesses, whether engaged in sales or supply of services would be impacted by GST. The impact would be on supply chains, ERP, product pricing, dealer margins etc. Even pure service providers would be required to charge GST.

Q.6 Whether Housing and construction sector would be covered under the ambit of GST?

A. Construction sector is a significant contributor to the national economy and housing expenditure dominates personal consumption expenditure. In view of the same. Housing and construction sector would be most likely covered under GST. Incidentally housing and construction sector is already covered under service tax, VAT etc.

Q.7 Whether Rail sector would be covered under GST?

A. Mr. Vijay Kelkar, Chairman of the 13th Finance Commission opined that the rail sector could be included under the GST umbrella to bring about significant tax gains and widen the tax net so as to keep the overall GST rate low. The inclusion of the rail sector in the tax regime which will do away with most of the indirect taxes should be done if the government wants to provide a level playing field to road and air transportation sector. This will have the added benefit of ensuring that all inter-state transportation of goods can be tracked through the proposed information technology. However, the matter is under the consideration of the Empowered Committee.

Q.8 Whether the existing check post at the state borders will be withdrawn after implementation of GST?

A. It may difficult to eliminate check posts given the concerns of state governments which may extent beyond collection of taxes and movement of goods to vehicle fitness examination, prevention of trafficking, collection of local cesses, octroi etc.

Q.9 What are the various types of GST?

A. GST is of two types- (a) Single or Unified GST and (b) Dual GST. Many countries have a unified GST system. However, countries like Brazil and Canada follow a dual system wherein GST is levied by both federal and state or provincial governments.

Q.10 What type of GST is expected to be applied in India

A. In India, a dual GST is being proposed wherein a central goods and services tax and state goods and services tax will be levied on the taxable value of a transaction. In India, due to federal structure, there is a proposal to introduce dual GST system.

Q.11 What is dual GST?

A. Under Dual GST system, GST is levied by both the federal and state of provincial governments. In India, a dual GST is proposed whereby a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of every transaction of supply of goods and services.

Q.12 What are the benefits of shifting to a dual GST system?

A. Dual GST is expected to be a simple and transparent tax structure with limited number of rates of tax. The result would be a reduction in the number of taxes at the Central and state levels, cut in effective tax rate for many goods, removal of current cascading effect of taxes, reduction of transaction costs for tax payers through simplified tax compliance, and increased tax collections due to wider tax base and better compliance.

Q.13 How will dual GST affect the fiscal health of states?

A. Being a consumption based tax, dual GST will result in better revenue collection for states with higher consumption of goods and services. The backward and less developed states would see fall in collections. The Centre is expected to put in place a mechanism to compensate states for any revenue loss due to GST.

Q.14 Will dual GST be levied in addition to the existing taxes?

A. No. It is proposed that the Central GST will subsume central excise duty (Cenvat), service tax, and additional duties of customs at the Central level; and value-added tax, central sales tax, entertainment tax, luxury tax, octroi, lottery taxes, electricity duty, state surcharges related to supply of goods and services and purchase tax at the state level.

Q.15 What will be the expected rate of GST

A. The combined GST rate is currently being discussed by the Centre and the Empowered Committee. The rate is expected to be in the range of 14-16%. Once the total GST rate is determined, the states and the Centre have to agree on Central GST and State GST rates. Today, services are taxed at 10% and the combined incidence of indirect taxes on most goods is around 20%.

Q.16 Will there be different rates for Goods and for Services?

A. Yes. It is expected that there will be single rate of GST for services at the Central and State Level. However, so far goods are concerned, there would not be one but a few rates of Central and State GST as under:

Zero Rates for goods of social importance

Special rates for gold, silver, precious metals, say 1%

Merit Rates

Revenue Neutral Rates

Q.17 What will be the taxable event under GST system?

A. The taxable event will be the "supply of goods" and the "supply of services". The current taxable event such as "manufacture", "sale of goods" "render of services" will not be relevant under GST system.

Q.18 Will there be uniform classification of goods (like Central Excise) under GST system?

A. It is expected that there would be an uniformity in the classification of goods under GST system.

Q.19 Will the Central GST and State GST would apply on all the transactions?

A. Yes. In every transaction (whether goods or services) both Central GST and State GST would apply at a predetermined rates.

Q.20 What will be the rate of taxation in case of interstate trade of goods?

A. At present interstate trade of goods is subject to payment of Central Sales Tax which is origin based. However, GST is a consumption based or destination based tax system. With the implementation of GST, CST is expected to be phased out. As a result, there would not be any tax when goods are sold on interstate basis. However, tax will be applicable in the destination state and not in the origin state.

Q.21 Whether GST would apply to stock transfers?

A. In GST, taxable event will be the "supply of goods" and the "supply of services" at the destination state. Therefore, stock transfers may be subject to GST at the destination state.

Q.22 Whether inter state supply of services will be subject to GST?

A. Yes.

However, detailed "place of supply "rules is to be framed for such transactions. It is a major challenge to the policy makers.

Q.23 What are the major challenges with regard to implementation of GST?

A. The introduction of the GST system is by far the most important tax reform in India. Consensus and co-ordination among states is required for it to succeed. Before it can be introduced, the Centre and states have to sort out issues like agreement on GST rates, constitutional amendments empowering states to tax services, taxation on inter-state transactions of goods and services, place of supply rules, drafting of Central GST and State GST legislation, consultation with all stakeholders including trade and industry associations before finalisation, administrative preparedness to implement the new tax regime and resolution of all other issues under discussion. This is a formidable challenge given that we have only limited time left.

Q.24 What are the implications of GST on imports and exports?

A. Basic Custom Duty will continue to there under GST system. However, the additional custom duty in lieu of CVD /Excise and the Special Additional Duty (SAD) in lieu of sales tax/VAT will be subsumed in the import GST.

The import of services will be subject to Central GST and State GST on a reverse charge mechanism. In other words, the GST will be payable by the Importer on a self declaration basis. Place of supply rules will determine which state will have the authority to get the tax. However, the taxes so paid will be available as Input Tax Credit and therefore it would be a revenue neutral.

Exports, however, will be zero rated, meaning exporters of goods and services need not pay GST on their exports. GST paid by them on the procurement of goods and services will be refunded.

Q.25 Whether the input tax credit for Central GST can be adjusted against liability of state GST or vice versa?

A. The proposed GST is likely to be a dual system that will support a Central and State GST chain separately. These two chains would be independent of each other. This implies that GST registered companies will not be able to adjust the input credits of one chain against the other. The Central GST chain is likely to integrate the existing excise duty and service taxes levied at the Central level while the State GST chain the current state-level VAT, other local levies and service tax on certain specific services on which States may get the powers to levy service tax. The input tax credit adjustments will operate within the respective chains but not across.

Q.26 Whether cross utilization of credits between goods and services be allowed under GST system?

A. Yes. Under GST system cross utilization of credit is allowed between goods and services. In other words, input tax credit received on purchase of goods can be adjusted against supply services and vice versa.

Q.27 Will the Input Tax Credit (ITC) and Cenvat Credit (CC) accumulated on the day of implementation of GST (expected date, 1st April, 2010) be allowed to be carried forward?

A. Most like "Yes". It is expected that both ITC and CC will be allowed to be carried forward under GST regime subject to fulfilment of certain conditions. The exact procedure and conditions will be specifically mentioned in the GST legislature.

Q.28 Will there be any threshold limits for the levy of GST?

A. It is expected that there will be uniform threshold limit and will be based on cumulative turnover of goods and services. Dealers with turnover below the threshold limit would not be covered under GST.

Q.29 Will exemptions from GST will be available? What will happen to the area based exemptions already granted to the investors?

A. Under GST regime, there will be a common list of exemptions for both the Central and State GST.

The tax benefits already enjoyed by the EOU, SEZ, Software Technology Park would continue to be available in the GST regime as well.

All area based exemptions schemes already in force are expected to be converted to post-tax cash refund schemes.

Q.30 Will there be a process of assessment under dual GST?

A. The dual GST is expected to be self assessed tax like existing VAT/CENVAT. However the authorities would have the power to audit and re-assess on a selective bases. The detailed procedural guidelines in this regard would be stated in the GST legislature.

Q.31 Whether there would be separate legislation for the Central and State GST

A. Yes. The Central GST law will be uniform and applicable throughout India. However, each state will legislate its own enactment to levy and collect the State GST based on common guidelines to be issued by the Empowered Committee of State Finance Ministers.

In Pursuit of Knowledge

Indirect Taxes

Goods and Service Tax (GST) Through Frequently Asked Questions

Timir Baran Chatterjee, Sr. Executive
Vice President (Corporate Affairs & Legal) and Company Secretary

Q.1 What is GST?

A. GST stands for Goods and Service Tax. It is a comprehensive value added tax.

Through a tax credit mechanism, GST is collected on value added goods and services at each stage of sale or purchase in the supply chain. GST paid on the procurement of goods and services can be set off against that payable on the supply of goods or services. But being the last person in the supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a last-point retain tax.

Q.2 How GST will have its impact on revenue for the producing states?

A. GST is a consumption based tax and not origin based. Under GST structure, the tax would be collected by the states where the goods or services are actually consumed i.e., where the goods are actually sold and not the goods where it is actually originated. Hence, losses could be heavy for producing states. In view of the above, the Centre is considering a proposal to compensate states for any revenue loss that they might suffer on implementation of the Goods and Services Tax. The move is expected to encourage the producing states to adopt the new tax structure scheduled to be implemented from April 1 next year.

Q.3 Which country introduced GST first?

A. France was the first country to introduce this system in 1954. Today it has spread to over 140 countries.

Q.4 Will prices go up after the implementation of GST?

A. In fact, the prices of commodities are expected to come down in the long run as dealers pass on the benefits of reduced tax incidence to consumers by slashing the prices of goods. So far services are concerned, the prices could increase in the short term in view of the increase of tax rate from the present 10% to approximately 14% to 16% under GST regime.

Q.5 Who would be impacted by the implementation of GST?

A. All businesses, whether engaged in sales or supply of services would be impacted by GST. The impact would be on supply chains, ERP, product pricing, dealer margins etc. Even pure service providers would be required to charge GST.

Q.6 Whether Housing and construction sector would be covered under the ambit of GST?

A. Construction sector is a significant contributor to the national economy and housing expenditure dominates personal consumption expenditure. In view of the same. Housing and construction sector would be most likely covered under GST. Incidentally housing and construction sector is already covered under service tax, VAT etc.

Q.7 Whether Rail sector would be covered under GST?

A. Mr. Vijay Kelkar, Chairman of the 13th Finance Commission opined that the rail sector could be included under the GST umbrella to bring about significant tax gains and widen the tax net so as to keep the overall GST rate low. The inclusion of the rail sector in the tax regime which will do away with most of the indirect taxes should be done if the government wants to provide a level playing field to road and air transportation sector. This will have the added benefit of ensuring that all inter-state transportation of goods can be tracked through the proposed information technology. However, the matter is under the consideration of the Empowered Committee.

Q.8 Whether the existing check post at the state borders will be withdrawn after implementation of GST?

A. It may difficult to eliminate check posts given the concerns of state governments which may extent beyond collection of taxes and movement of goods to vehicle fitness examination, prevention of trafficking, collection of local cesses, octroi etc.

Q.9 What are the various types of GST?

A. GST is of two types- (a) Single or Unified GST and (b) Dual GST. Many countries have a unified GST system. However, countries like Brazil and Canada follow a dual system wherein GST is levied by both federal and state or provincial governments.

Q.10 What type of GST is expected to be applied in India

A. In India, a dual GST is being proposed wherein a central goods and services tax and state goods and services tax will be levied on the taxable value of a transaction. In India, due to federal structure, there is a proposal to introduce dual GST system.

Q.11 What is dual GST?

A. Under Dual GST system, GST is levied by both the federal and state of provincial governments. In India, a dual GST is proposed whereby a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of every transaction of supply of goods and services.

Q.12 What are the benefits of shifting to a dual GST system?

A. Dual GST is expected to be a simple and transparent tax structure with limited number of rates of tax. The result would be a reduction in the number of taxes at the Central and state levels, cut in effective tax rate for many goods, removal of current cascading effect of taxes, reduction of transaction costs for tax payers through simplified tax compliance, and increased tax collections due to wider tax base and better compliance.

Q.13 How will dual GST affect the fiscal health of states?

A. Being a consumption based tax, dual GST will result in better revenue collection for states with higher consumption of goods and services. The backward and less developed states would see fall in collections. The Centre is expected to put in place a mechanism to compensate states for any revenue loss due to GST.

Q.14 Will dual GST be levied in addition to the existing taxes?

A. No. It is proposed that the Central GST will subsume central excise duty (Cenvat), service tax, and additional duties of customs at the Central level; and value-added tax, central sales tax, entertainment tax, luxury tax, octroi, lottery taxes, electricity duty, state surcharges related to supply of goods and services and purchase tax at the state level.

Q.15 What will be the expected rate of GST

A. The combined GST rate is currently being discussed by the Centre and the Empowered Committee. The rate is expected to be in the range of 14-16%. Once the total GST rate is determined, the states and the Centre have to agree on Central GST and State GST rates. Today, services are taxed at 10% and the combined incidence of indirect taxes on most goods is around 20%.

Q.16 Will there be different rates for Goods and for Services?

A. Yes. It is expected that there will be single rate of GST for services at the Central and State Level. However, so far goods are concerned, there would not be one but a few rates of Central and State GST as under:

Zero Rates for goods of social importance

Special rates for gold, silver, precious metals, say 1%

Merit Rates

Revenue Neutral Rates

Q.17 What will be the taxable event under GST system?

A. The taxable event will be the "supply of goods" and the "supply of services". The current taxable event such as "manufacture", "sale of goods" "render of services" will not be relevant under GST system.

Q.18 Will there be uniform classification of goods (like Central Excise) under GST system?

A. It is expected that there would be an uniformity in the classification of goods under GST system.

Q.19 Will the Central GST and State GST would apply on all the transactions?

A. Yes. In every transaction (whether goods or services) both Central GST and State GST would apply at a predetermined rates.

Q.20 What will be the rate of taxation in case of interstate trade of goods?

A. At present interstate trade of goods is subject to payment of Central Sales Tax which is origin based. However, GST is a consumption based or destination based tax system. With the implementation of GST, CST is expected to be phased out. As a result, there would not be any tax when goods are sold on interstate basis. However, tax will be applicable in the destination state and not in the origin state.

Q.21 Whether GST would apply to stock transfers?

A. In GST, taxable event will be the "supply of goods" and the "supply of services" at the destination state. Therefore, stock transfers may be subject to GST at the destination state.

Q.22 Whether inter state supply of services will be subject to GST?

A. Yes.

However, detailed "place of supply "rules is to be framed for such transactions. It is a major challenge to the policy makers.

Q.23 What are the major challenges with regard to implementation of GST?

A. The introduction of the GST system is by far the most important tax reform in India. Consensus and co-ordination among states is required for it to succeed. Before it can be introduced, the Centre and states have to sort out issues like agreement on GST rates, constitutional amendments empowering states to tax services, taxation on inter-state transactions of goods and services, place of supply rules, drafting of Central GST and State GST legislation, consultation with all stakeholders including trade and industry associations before finalisation, administrative preparedness to implement the new tax regime and resolution of all other issues under discussion. This is a formidable challenge given that we have only limited time left.

Q.24 What are the implications of GST on imports and exports?

A. Basic Custom Duty will continue to there under GST system. However, the additional custom duty in lieu of CVD /Excise and the Special Additional Duty (SAD) in lieu of sales tax/VAT will be subsumed in the import GST.

The import of services will be subject to Central GST and State GST on a reverse charge mechanism. In other words, the GST will be payable by the Importer on a self declaration basis. Place of supply rules will determine which state will have the authority to get the tax. However, the taxes so paid will be available as Input Tax Credit and therefore it would be a revenue neutral.

Exports, however, will be zero rated, meaning exporters of goods and services need not pay GST on their exports. GST paid by them on the procurement of goods and services will be refunded.

Q.25 Whether the input tax credit for Central GST can be adjusted against liability of state GST or vice versa?

A. The proposed GST is likely to be a dual system that will support a Central and State GST chain separately. These two chains would be independent of each other. This implies that GST registered companies will not be able to adjust the input credits of one chain against the other. The Central GST chain is likely to integrate the existing excise duty and service taxes levied at the Central level while the State GST chain the current state-level VAT, other local levies and service tax on certain specific services on which States may get the powers to levy service tax. The input tax credit adjustments will operate within the respective chains but not across.

Q.26 Whether cross utilization of credits between goods and services be allowed under GST system?

A. Yes. Under GST system cross utilization of credit is allowed between goods and services. In other words, input tax credit received on purchase of goods can be adjusted against supply services and vice versa.

Q.27 Will the Input Tax Credit (ITC) and Cenvat Credit (CC) accumulated on the day of implementation of GST (expected date, 1st April, 2010) be allowed to be carried forward?

A. Most like "Yes". It is expected that both ITC and CC will be allowed to be carried forward under GST regime subject to fulfilment of certain conditions. The exact procedure and conditions will be specifically mentioned in the GST legislature.

Q.28 Will there be any threshold limits for the levy of GST?

A. It is expected that there will be uniform threshold limit and will be based on cumulative turnover of goods and services. Dealers with turnover below the threshold limit would not be covered under GST.

Q.29 Will exemptions from GST will be available? What will happen to the area based exemptions already granted to the investors?

A. Under GST regime, there will be a common list of exemptions for both the Central and State GST.

The tax benefits already enjoyed by the EOU, SEZ, Software Technology Park would continue to be available in the GST regime as well.

All area based exemptions schemes already in force are expected to be converted to post-tax cash refund schemes.

Q.30 Will there be a process of assessment under dual GST?

A. The dual GST is expected to be self assessed tax like existing VAT/CENVAT. However the authorities would have the power to audit and re-assess on a selective bases. The detailed procedural guidelines in this regard would be stated in the GST legislature.

Q.31 Whether there would be separate legislation for the Central and State GST

A. Yes. The Central GST law will be uniform and applicable throughout India. However, each state will legislate its own enactment to levy and collect the State GST based on common guidelines to be issued by the Empowered Committee of State Finance Ministers.



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